NEW YORK ( TheDeal) -- Weyerhaeuser ( WY) fell on Tuesday as investors erased gains in the share price made following its acquisition of land manager Longview Timber LLC for $2.65 billion. Weyerhaeuser shares fell 1.5% to $28.24 after gaining 1.3% on Monday. The deal comes after Weyerhaeuser has spent seven years restructuring its operations and paring down assets from 2006 as part of a conversion to a real estate investment trust. Weyerhaeuser's board approved the change to a REIT structure in December 2009; the move was done to reduce its tax rate. Almost $10 billion in assets were unloaded between 2006 and 2011. "This strategic acquisition comprises approximately 640,000 acres of unique, high-value timberland in Washington state and Oregon. This acquisition will expand Weyerhaeuser's holdings in the Pacific Northwest by 33% to approximately 2.6 million acres and will increase the amount of timberlands we own or control to approximately 7 million acres," chief executive and president Daniel S. Fulton said on a conference call Monday morning. The Longview, Wash.-based target is held by Toronto global investment firm Brookfield Asset Management Inc. After debt repayment and distribution of funds to investors, Brookfield and affiliates will realize a total of $1.07 billion in proceeds through the deal. Brookfield also announced the sale Sunday of a sister business, Longview Fibre Paper and Packaging Inc., to KapStone Paper and Packaging Corp. for $1.025 billion. Longview Fibre Paper and Packaging operates a large integrated paper mill at Longview and seven container plants in the Pacific Northwest. After repayment of debt and distribution of proceeds to the other investors in the fund, net cash proceeds to Brookfield will be approximately $250 million on the Longview Fibre Paper deal. "We acquired these timberlands and manufacturing assets as one business in 2007 and restructured the business, separating the manufacturing business from the timberlands," said Cyrus Madon, senior managing partner in Brookfield's private equity group. The Longview Timber deal should close in July. Weyerhaeuser will fund the deal with a 50-50 newly raised split of equity and debt worth $2.45 billion, according to an investor presentation accompanying the call. Much of the acquired land breeds Douglas fir, a preferred tree species that is prized as a structural building material and thus commands a premium in the export market.
"About two-thirds of the timberland's inventory is Douglas fir, which we have more than 100 years experience owning and managing," executive vice president Thomas F. Gideon added on the call. Gideon said the acquired land will enhance the buyer's export prospects. "The highest quality logs are going to Japan, which represents more than 80% of our export market. The Japanese value the favorable properties of Douglas fir, including its size, its strength, its stiffness, its resistance to splitting and its ability to stay straight," he explained. Longview Timber generated $43 million in Ebitda and investment distributions of about $20 million for the first quarter, said CFO Patricia Bedient on the call. Weyerhaeuser said it would realize about $20 million in annual synergies through the deal. A committed senior unsecured bridge facility from Morgan Stanley will support the financing, Weyerhaeuser added. The buyer plans to raise up to $558 million through the sale of mandatory convertible preference shares and up to $884 million of common stock to finance its $2.4 billion acquisition of Longview Timber, according to Securities and Exchange Commission filings. In addition to the equity issuance, the company said it plans to raise $1.22 billion in debt and use $335 million in cash to pay for the acquisition. The convertible shares will be priced at $50 per share and total up to 11.5 million with an underwriter option. The common share offering will total up to 32.2 million if underwriters exercise the option. Meanwhile, Weyerhaeuser said on the call the time was right for a strategic review of its homebuilding business because of improving economic conditions. Analysts had predicted a sale of this unit since at least November 2011, seeing it as noncore to Weyerhaeuser's role as a timber producer. A source put the value of the homebuilding unit at between $2.4 billion and $3.1 billion. "
Weyerhaeuser Real Estate owns or controls land and lots in southern California, Las Vegas, Washington D.C., Houston and Washington State," analyst Joshua Barber of Stifel, Nicolaus & Co. wrote in a Monday note. Homebuilder confidence is indeed increasing. The National Association of Home Builders/Wells Fargo Housing Market index surged to 52 in June from 44 in May, handily topping forecasts for 45, according to a report Monday. Longview didn't return calls Monday. Brookfield declined comment.
Brookfield has more than $175 billion in assets under management. Its shares on Monday closed up 85 cents, or 2.4%, to $36.22, giving it a market value of $22.3 billion. Weyerhaeuser shares on Monday closed up 37 cents, or 1.3%, to $28.66, giving it a market capitalization of $15.7 billion. Written by Thomas Zadvydas in New York with contributions from Jonathan Schwarzberg.